Spending is largely emotional

I was just listening to an excellent episode of the Mad FIentist Podcast and I had to stop listening to make this post.  I’m just around 14 minutes into it and the host and guest (JD Roth) made great points about how spending is largely emotionally driven.  The guest was telling of his history from being deeply in debt to conquering the debt.  He also made the point that he knew the math side of personal finance very well, but lost control of the emotional side and that’s how he ended up in debt.  Personally, I can relate to his story very well.  I had fallen victim to the exact same disease: emotional spending.  The emotional high that would come with a purchase and the crash that would come when I would have to ‘pay the man’ when the time came.  I’ve still got to ‘pay the man’, but now I know why and recognize that much of spending is emotional (not just mine, but, I’d guess, everybody else’s as well).

Most people around the US have at least enough to cover their basic needs and more.  There are two spots where most of the difficulty seems to come in: 1) lifestyle inflation (aka – ‘keeping up with the Jones’) and 2) emotional spending (aka – ‘this will make me feel good and I deserve it!’).  As with most any ‘recovery’ program, you need to realize and acknowledge that you have a problem.  A great thing to add is a solid plan for dealing with said problem.  I had to go through this at least twice with my personal financial problem.  Like the podcast guest, I knew the math and results on paper, but translating that into something meaningful, tangible and emotional was a bit more work.  I’ll go a bit more into personal financial detail in a future post, but let’s say that I’ve learned my lessons about being in debt the hard way.  I now recognize that spending is much too easy and every cent counts!

FIRE Intro

The prevailing thinking on retirement is backwards. The status quo is focused on saving a minuscule amount while spending the remainder of income (or more). The key to financial independence and/or early retirement is to, per usual, go directly against the status quo. If the end goal is early retirement or just being financially independent, the means to that goal are the same; switch the percentages of your ‘financial pie’. In a recent white paper that I read, a suggested mix for finances was 20/60/20 the two 20% figures being saving/investing and discretionary spending and the 60% being ‘essential’ expenses.

I would recommend striving for the following:

Minimize ‘essential’ and discretionary expenses. Strive for zero, but try to get the combination of the two under $15k per adult in your family, half of that or less for children. Maximize savings by putting the remainder of income into savings and investments.

I know what you may be thinking, “I’m already saving my 20% or more, why should I save more?” Simple, if you want to be financially independent or retire early, you need to do something different in order to achieve a different outcome from retiring when you’re 62, 65, 67 or never. The higher percentage of your income that you can invest, the lower the amount of time until you reach financial independence. Here’s the easy formula (assuming zero net worth):

Yearly expenses / .04
——————————  = Years until FI
    yearly saving

For example:
after tax income = $70k
yearly expenses = $30k
yearly savings (roughly $70k-$30k) = $40k

thus $30k x .04 = $750k / $40k = 18.75 years

The picture above only gets better with additional details such as pre-tax savings (401k anyone?) and having a positive net worth (subtract it from the the numerator; in the example, subtract it from the $750k).

There are tons of hints, tips, tricks and other useful pieces of info to help get to a good savings rate that are covered on the inspirational blog noted below and I plan to illustrate some here as well.  Check it out!

Inspired by the ‘Shockingly Simple Math behind Early Retirement’:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/